Occasionally I publish answers to select readers’ money questions. I welcome your opinion in the comments. Send questions to firstname.lastname@example.org. I can’t get to them all but will do my best!
Q: I’ve been employed for six months. I’m 30 (school took a long time) so this is my first time investing. I am maxing out my 401(k) at work but want to save more because I started late. I was looking at a Roth IRA but I earn too much ($105,000 plus a bonus). What kind of saving options do I have and what is the best way to save the annual bonus I expect to receive? —Carly
A: As long as you have a 401(k) at work, maxing it out is your best bet at your current income level because, as you discovered, you’ll be excluded from making a full Roth IRA contribution.
Do you have a cash emergency fund? Although a savings account isn’t an investment per se (interest rates won’t even cover inflation), I recommend everybody have at least $5,000 (or the equivalent of six months’ expenses) in cash that’s quickly accessible. Don’t have this yet? Simply stash your bonus away in an online savings account for a rainy day.
Got the emergency fund covered? Then to continue investing, it’s time to look at a taxable investment account.
The good news is you can invest however you want and you can access your money whenever penalty-free. (With a 401(k) or IRA you typically need to wait until retirement to withdraw the money or face paying a 10% early-withdrawal penalty to Uncle Sam.)
The downside is that when you sell these investments you’ll pay capital gains taxes on any returns (although you can deduct losses sometimes, too). To minimize your tax bill, hold onto investments for at least one year.
Betterment is another option: it’s a pretty cool new investing platform that makes investing in the stock market about as simple as opening a savings account.
If you continue to max out your 401(k) and invest more on top, you should build a nice portfolio quickly.
If you ever decide you want help choosing the right investments in your taxable account, you may consider hiring a financial advisor, especially once you have $150-$200k invested. My advice: Look for a fee-only financial planner who will serve as a fiduciary (meaning he or she must put your financial interests first). You can find a list at the National Association of Personal Finance Advisors.